JB Hi-Fi Managing The Conditions

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This story features JB HI-FI LIMITED, and other companies.
For more info SHARE ANALYSIS: JBH
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

The Reserve Bank of Australia (RBA) surprised investors yesterday with its 1.0% cut in official interest rates and the move has restored the confidence of some in the market the Australian economy can get through the current global financial crisis with nothing worse than a soft landing.

The move also brings the market’s focus back onto the discretionary retail sector, as with lower interest rates households may feel a little more inclined to go out and spend some money that otherwise may have been earmarked solely for mortgage repayments.

One stock likely to come under increased attention is JB Hi-Fi ((JBH)), particularly as management yesterday updated on trading so far in FY09 and the news was largely positive. As Macquarie notes, sales for the first quarter of the financial year are in line with budget and earnings for July and August are a little better than expected.

The broker also notes cost control has been good and margins are holding well, which it sees as a good outcome given how competitive the sector is in the current operating environment. The only problem in its view is the stock seems fully valued at current levels when the economic environment is factored in, meaning the broker doesn’t see enough upside at present to shift from its Neutral rating.

As well, the broker points out the rate cut by the RBA was in response to weak conditions rather than being an attempt to create stronger conditions, meaning it might only stop things from getting worse rather than helping them get any better.

Others are more positive, with UBS suggesting on the back of the trading update the company should be able to deliver earnings per share growth this year of almost 29%. As well it suggests the rate cut is a positive for the economy generally and the sector in particular and this can only benefit the company.

The broker is forecasting earnings per share (EPS) of 78c this year and 91c in FY10, which compares to Macquarie at 75.6c and 86.6c for the next two years and consensus forecasts according to the FNArena database of 76.6c and 91.7c respectively.

According to Credit Suisse, the major positive to come out of the trading update is that it should help with confidence towards the stock, particularly after the downgrade to guidance offered by competitor Harvey Norman ((HVN)) last week. The broker has not changed forecasts on the news and so retains its Neutral rating.

Overall, the FNArena database shows the stock is rated as Buy six times and Hold four times, with an average price target of $14.22. As at 12.05pm today the stock was down in line with a weak overall market, trading 74c or 6.2% lower at $11.21. Over the past year the shares have ranged between $8.58 and $17.00.

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